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Citigroup is partnering with Euroclear and Clearstream to combine client holdings into a single collateral pot to cope with more stringent trading rules, Financial News has learnt.

Under the arrangement, Citi will make securities that it holds in custody for mutual clients available for use as collateral by Euroclear and Clearstream. The assets remain under Citi’s custody, and the tri-party agents manage the collateralisation process directly from client trading accounts.

The new system will streamline current procedures under which broker dealers identify available pools of assets and deliver those to tri-party agents, who manage the collateralisation of their exposures. Broker dealers' tasks require a large operational infrastructure.

Russell Pudney, head of tri-party collateral management at Citi Transaction Services, said: “Under the new solution, the tri-party agent determines and instructs the security moves on behalf of the broker dealer, from the client trading accounts at Citi to a tri-party provider account at Citi.”

The solution combines all of a broker dealer's domestic assets held at Citi, with their international assets held at the tri-party agents, creating “a single and much larger virtual pool of assets”. The tri-party agent can then collateralise exposures.

The solution also improves what the industry calls the “optimisation” of collateral – ensuring that the appropriate securities held in a broker dealer’s account are used as collateral.

The new service will be offered through Euroclear’s ‘collateral highway’, which helps to link up holders of collateral with various collateral destinations, such as central counterparties, and Clearstream’s agent bank service known as the ‘liquidity hub connect’.

Pudney told Financial News: “This service will improve the automation and in particular focuses on improving the operational efficiency of mobilising collateral, equity and fixed income, from where it is held to where it is needed, reducing fragmentation of collateral pools.”

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The Dodd-Frank Act and the European Market Infrastructure Regulation, or Emir, come into force this year. They require that most over-the-counter derivatives trades take place through a CCP, which sits on both sides of a trade and protects parties in the event of a default. These CCPs require high quality collateral – in the form of cash or securities – be posted against these trades as a safety net.

These regulations are expected to require an additional $2 trillion of collateral in the system.

Pudney said: “There is a growing use of collateral and move away from unsecured funding , particularly with the new regulatory environment that we are all facing. The impact of Dodd Frank, Emir and Basel III in particular are accelerating the need for more efficient and automated collateral management solutions that reduces collateral fragmentation.”

The increased emphasis means the operational efficiency of locating and mobilising collateral will be more important than before.

Citi said it expects to roll out the solution in certain markets by the end of March.

In a statement, Frederic Hannequart, chairman of Euroclear Bank, said: “Citi and Euroclear Bank will help our clients better manage counterparty exposures, ease access to liquidity and make more effective use of their assets as collateral, while alleviating the challenges of collateral fragmentation."

Jeffrey Tessler, chief executive at Clearstream, said: “We’ve been on the fast lane with these services for a number of years now and the open architecture of the Global Liquidity Hub means our collateral pool continues to broaden and deepen, while we continue to deliver collateral management services that are exceptionally user-friendly – and live.”